LPs target debt, small funds

LPs searching for new GP relationships have expressed a preference for debt funds and lower-mid market strategies, says partner at CTC Consulting JB Hayes.

Private equity limited partners looking for new managers have been moving away from equity investing into credit and debt strategies.

“Whereas our clients were typically doing buyout [and] venture capital, now it’s senior secured lending or corporate distressed,” said J.B. Hayes, partner at Portland, Oregon-based consultant CTC Consulting, which spun out of Bank of America in 2008. “There’s been an overall shift away from equity and into credit.”

Hayes was speaking at the Association for Corporate Growth’s 2012 InterGrowth Conference in Dallas Thursday.

The lower mid-market is actually in favour, which wasn’t really the case five or six years ago

JB Hayes

LPs adding new general partner relationships typically have been investing with smaller GPs than in recent years, Hayes added.

“I’ve seen such a shift toward niche funds and smaller partnerships,” he said. “The lower mid-market is actually in favour, which wasn’t really the case five or six years ago.”

One reason LPs have moved away from larger investors is for diversification from public markets, according to managing principal at Graham Partners, Rob Newbold.

“If you’re [investing in] very large deals…a high percentage of those exits are going to be IPOs, and you’re not really moving away from the public markets,” he said. “You’re not really getting that differentiation that you’re looking for.”

While the vast majority of LPs have been working to reduce their number of GP relationships rather than add new investment partnerships, new entrants into the market continue to act as fresh sources of capital for GPs.

“There is even new money believe it or not here in North America that is trying to grow programmes,” said Joncarlo Mark, founder of Upwelling Capital Group, an advisory and investment management firm that works with institutional investors to help with restructuring legacy assets.

“I would really spend a lot of time looking at the smaller institutions, the family offices of the world, and of course international clients. Where the US pension funds have stalled in their commitments, we have seen big fundraises recently where that void has been filled by sovereign wealth funds and international investors,” he said.

“Their appetite is enormous for private equity.”